Stock Market Information

As I write this, the Dow Jones is plunging. At present pace it’s down about 230 points which is obviously bad, but not nearly as bad as I was expecting. It’s been a rough go no matter where you are in the market right now. As a whole, the stock market has been mercilessly cut down in the past few weeks. Given the fall of Lehman Brothers which declared bankruptcy, Merill Lynch being sold to Bank of America, and AIG heading into restructuring, no amount of good news will be able to pull this market out of it’s funk, at least not yet.

That said, there’s plenty of panic in the streets, and everyone’s wondering what this means exactly for the financial sector. Certainly it’s a big shakeout, and some big players got burned so badly by worthless mortgage securities that now it will leave just a few institutions standing. When home prices stabilize and the dust clears, that’ll provide opportunity for those left standing. There will be significantly less competition for the big players like Bank of America, who has been aggressively buying up companies like Merill Lynch and Countrywide. Thus far they’ve done so without any damage to their dividend yield, either. Whether they’ll get out of this unscathed remains to be seen, and as always it’s not a recommendation, but a point for further research if you’re looking to get some opportunity from the chaos. At this stage of the game, no one is safe.

Questions about as to how the Fed will respond. Will we see another emergency rate cut? It’s hard to say, but I’m sure there’s plenty of worry and anxiety over there. Personally I wouldn’t want to be anywhere near the Fed right now, as they have some difficult decision making to do in the interim.

Investors weren’t sure what to expect after the government announced it would seize control of the nation’s two largest mortgage lenders, Fannie Mae and Freddie Mac, in a bid to help ease the increasing spread of the credit crunch. For now, it appears, the markets are fairly happy with the move and so we’ve seen some significant gains in the broader indexes thus far today.

What the future ramifications are for taxpayer’s is admittedly less clear. Certainly both firms have seen staggering losses, and with the government stepping in that means the cost is going to be passed on to taxpayers instead. A rough estimate pegs the losses the government will have to cover at least $50 billion, but Paulson was less forthcoming as to what the exact costs would be. For it’s part the government has promised to back both firms with up to $100 billion each in capital. That’s no small chunk of change.

For the broader real estate markets, this could mean some welcome relief. The government’s program could help to bring mortgage rates down in the near future, which could help to attract buyers in a market that sorely needs them.

It’s not all good news however, for the real estate or for the stock market. Hopes have been stirred in the short term, but the change won’t bring about positive effects overnight. There’s still high unemployment, sluggish growth across the board, and other problems that the economy faces. In addition while rates could be lowered it’s likely to remain fairly high as investors demand a higher rate to offset risking investing in mortgage securities. At the very least it’s a step in the right direction, but certainly not a magic bullet.

Much of an individual stock’s performance and returns are based on the fact that the company is built up and handled well by a variety of individuals. From quality factory workers all the way up to the CEO, how a company runs and performs will make or break the price of that stock. In the case of Ford and General Motors, the stocks have been crushed, and for good reason. The management at both Ford and GM failed to see the growing warning signs that consumers would not always want giant SUVs and gas-guzzling trucks, but they continued to build them because they were the cash cow of the company and it would be expensive to make changes. Their lack of foresight put foreign auto-makers like Toyota and Honda in a perfect position to crush them, given their line of hybrid cars and other small car offerings.

With this in mind, why should the government step in to save a company that failed to keep up with the competition? GM and Ford are both long-time American companies, but big players have gone down before and they will again. The government can’t intervene for every business that will go under, it certainly can’t afford to.

A recent article at CNN Money examined the likelyhood of the government stepping in:

The $50 billion loan package, first proposed by the auto industry last month, has won the support of presidential candidates Barack Obama and John McCain as their campaigns eye key votes in Michigan and Ohio.On Tuesday, White House Press Secretary Dana Perino signaled the outgoing Bush administration was open to approving the loans.

Like or not, it appears that the government will step in to save a dying company if it’s large enough and will get them votes. What ramifications that may have in the future is unknown, but time will tell.